Monday, November 07, 2011

Product Endorsement: Wealthfront

Andy Rachleff gave XiaoQin and I a presentation four weeks ago on their latest wealth management product, and just lifted the embargo on me writing about it on my blog. I walked through the demo and worked through various scenarios, and I'm impressed.

Those of you who've been to my talks or read my financial posts know that I dislike wealth managers, and traditional banks that take your money and charge you huge amounts of money (usually 1% of total wealth) for what could easily be done with a spreadsheet or computer program. But there are people who can't manage their wealth themselves, either through lack of interest, inability to deal with the numbers involved, or (most common among engineers) lack of emotional control, which has very little correlation with intelligence or success in other areas of life.

What Wealthfront has done is to write that computer program. The result is one that interviews you to figure out your risk tolerance, then does Mean-Variance Optimization (MVO) and provide recommendations for performing asset allocation. There are many MVO programs that exist, but the biggest problem is actually getting the data: Wealthfront pays about $300k/year to get access to historical data so the MVO actually isn't garbage-in/garbage-out. This is the kind of stuff you get if you got William Bernstein, for instance, to manage your money.

What's more, the output isn't just provided to you with no context. You get an explanation of why the program picked certain ETFs, and you get to over-ride the results of the risk-tolerance analysis if you believe that the interview did not provide correct/optimum results. The service does automatic rebalancing, automatic accumulation of dividends to as part of the rebalancing scheme, and might in the future also offer automatic divestment of company stock. This is excellent stuff, and stuff I tried to get the Google Finance team interested in doing instead of creating yet another day-trader web-site.

The fee for all this? They've decided to go with a Freemium model: free management up to the first $25,000, and 0.25% for all money above that. (Yes, you can run A-B comparisons between your wealth manager/spreadsheet against Wealthfront to see who does better --- note that if you do that, you should take risk into account! A riskier portfolio could out perform Wealthfront, and if you have a good few years you could be fooled into taking more risk than you desire) More interestingly, past a certain level, they'll offer access to alternative assets such as hedge-funds and the absolute-return funds that university endowments get access to, which is responsible for much of their outsized returns in recent years.

Even better, if you choose to do it yourself, you can use their website to gauge what your efficient frontier is and then execute those trades yourself manually without paying wealthfront. The risk in doing that is that you won't have the emotional control and financial discipline to rebalance your portfolio, which is critical for high performance and wealth preservation. In that area, Wealthfront actually does something real nice, which is to accumulate dividends so that transaction costs are minimized and do the rebalancing all at once. Yes, they also take into account taxes, and so won't do small transactions that cause you to have a tax reporting headache. If you don't already have a legacy portfolio, these are the first wealth management folks that I am willing to endorse. I am not an employee, shareholder, investor, or otherwise compensated by wealthfront for making the above statement. In fact, I do occasionally get paid as a financial adviser for high and medium networth individuals to manage their portfolio, so in some sense I'm working against my self-interest --- people paying them certain won't be paying me!

Visit Wealthfront's Beta site so you can get an access code.
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